The topology of trade
Over the past several decades, economic activity has shifted from local trade to a more globalized network of services, manufacture, and consumption. The same tools of network theory that have worked well at describing other interconnected activities—from telecommunications systems to evolving populations of biological species—can yield insights into the effects of globalization on the world economy. Writing in Physical Review Letters, Jiangkui He and Michael Deem of Rice University in the US specifically examine how trade networks respond to abrupt change during increasing globalization, and they reveal some surprising effects.
The authors construct networks that represent how countries trade with each other. They measure whether a given trade network is nonhierarchical (i.e., evenly distributed trade among many countries) or hierarchical (i.e., treelike, containing clusters of countries that trade among themselves more frequently than with others outside the cluster) by means of a special correlation coefficient. He and Deem then show that the real-world global trade network has become less hierarchical over time, an expected result of globalization. However, when they apply a shock to their model system, for example, an economic recession, the system is both more sensitive to the shock and tends toward more hierarchical trading. Moreover, the less hierarchical the trading environment, the longer it takes the system to recover from shocks—perhaps lending insight into the current global economic slump. – David Voss